A while back, i posted a couple of brief pieces on sevenstring.org that looked at the high-level economics of running a small guitar business. I still get occasional requests for a link back to the original posts, so i thought i’d extract it, update it and post it here, so there’s a more permanent (and easily-found) record of it. This is the first of two parts.

Why guitars cost what they do.

I’ve noticed in the last few years that there has been increasing demand for “custom shop” instruments. It’s one of those things that ebbs and flows over time, and the current economic situation notwithstanding, we seem to be on one of those upward swings where guitarists reach a certain level in their playing, and they’re no longer satisfied with “off-the-shelf” instruments, and start looking for something unique, something different, or something that just suits them better.

Along with this trend, i’ve also noticed (in general terms) that the average age and pocketbook depth of people seeking boutique or custom-shop instruments seems to be inversely proportional to the demand. I can’t count the number of threads on guitar discussion forums i’ve seen where a young player thinks he or she can get a guitar built to their spec for $1000 or less. A worrying trend is that there have actually been a few luthiers who will take them up on it.

Yet when you stop and look at what the true costs of building guitars as a small independent builder, you get a very different picture. No matter how you frame it, penny-pinching, perpetually broke musicians often don’t seem to understand why their dream custom guitar from a small builder should actually cost much, much more than the $1000 they’re willing to shell out. They can’t comprehend why the price list at a big-name custom shop like Jackson starts at around $3500. Click past the break to read more…

Lots of luthiers command premium prices… and they should.

It’s really hard to make a living at building guitars full-time. Unless a luthier is charging premium prices for their product, (or they’re cranking stuff out in volume) in order to have a profitable business that’s going to grow – and pay themselves a decent wage so they can have a house, a car, a family and a life – they need to charge what the guitars are actually worth, and not be afraid to actually make a profit on every instrument sold.

For example, take a look at the range of pricing on David Myka‘s site. He’s a small builder whose work i admire a lot, and he’s been gradually building a stellar reputation for the last few years. His cheapest guitar starts at $2750, and they go up from there. Way up. Just taking a wild guess, but i wouldn’t be surprised (knowing his work and the kind of players he’s likely attracting) if his average selling price – once the guitars are optioned-up with killer woods and top-notch hardware and pickups – is pushing $4k.

Simple economics.

Say you’re a luthier just getting started. How much do you need to make in a year to have a comfortable life? How much money does your business need for a shop (plus heat and light), tools, raw materials, consumables (blades, drill bits, router bits, paint, glue, etc.) and enough cash flow so you can buy and stockpile wood, hardware and other parts? Add those two numbers together, and that’s your minimum profit you have to make every year.

Let’s just say you want to bring home a modest income of $50k per year. Assuming a cost of about $500 per instrument for the raw wood, hardware, electronics (all at wholesale prices – not retail) and a fairly modest final selling price of $2500, let’s assume half of that profit goes to the business and half goes to pay yourself a fair wage… you would have to build 50 instruments a year at that price to pay yourself that $50k.

That leaves only $50k for the business, for rent, utilities, tools, materials, etc. And that doesn’t even take into account things like a marketing plan to help grow the business, or potentially having to pay a bookkeeper to help run the numbers, or eventually maybe having an extra set of hands to answer phones, take orders, help pack and ship instruments, maintain a Web site, etc. This also doesn’t include the cost of building prototypes, getting tooling, templates and jigs made, the time spent doing research and development, legal fees, taxes and so on. That’s actually a pretty slim profit.

Drop the selling price by 30% and the volume has to increase considerably to maintain a comfortable profit, because your costs are fixed and dropping the selling price has just eaten up your margin. Drop the selling price too far, and the business isn’t profitable (at best) or you can’t make ends meet, can’t even pay yourself, and the business folds (at worst).

Of course, working out of a home workshop will save some of those costs, but it’s still hard to make it a profitable business if you want it to flourish and grow. And some people are actually embarrassed about making a healthy profit. If you’re one of those people, you really need to get over that. Businesses are not sustainable without profit. Period.

The seduction of production… doing it in volume (or die trying)

I think a lot of luthiers chronically under-charge for their work, especially when they’re starting out. Many of them get seduced by the idea of keeping their prices artificially low to spark demand, and then trying to meet their revenue and profit targets by trying to build stuff in volume. They end up keeping the business afloat for a short while on all the deposit money that comes in with the customer orders – robbing Peter to pay Paul, so to speak – and before they know it, they’re in over their heads and staring down a three-year backlog of orders and they’re STILL just barely squeaking by.

These backlogs of work result in lengthy wait times, which inevitably leads to unhappy customers, and real potential for the business to collapse under its own weight. They’re also not likely paying themselves a decent wage while doing this, because they’re working with slim-to-nonexistent profit margins to begin with. And slim profit margins means there’s no money to hire extra hands to try and process the work more quickly. Even if they could build more quickly, if their margins are too slim to begin with, building twice as many instruments won’t make them more profitable… the economies of scale only really start to take effect when you get into larger-scale manufacturing. For the small builder, either you profit or you die. I’ve seen this happen numerous times, when talent, skill and ambition meet terrible business sense.

Based on the numbers above, you’re looking at producing about an instrument a week, on average. With no vacation time or sick days. I think it would be quite a challenge for a one-person shop to deliver an instrument a week. Stretch that timeline out to an instrument every two weeks, and you’d have to double your selling price to $5000 to make sure the cashflow stays in positive territory and you pay yourself a living wage.

As you can see from this very basic introduction to the economics of building guitars, it really is not unreasonable for boutique or custom-shop instruments from small independent luthiers to cost $3500 to $5000 or more.

Now, some people are doing it as a hobby or a part-time pursuit, and aren’t expecting to make a living from it… but guitarists should not make that assumption and pressure prices unrealistically downward.

For a more detailed analysis of what it costs to run a small CNC-equipped shop, Mike Sherman (who worked in Hamer’s custom shop and later ran Washburn’s custom shop before moving out on his own) wrote a summary of some of his hard costs… quite an eye opener!

Watch for Part II, coming in a few days…